Last week, the Commodity Futures Trading brought and resolved its second enforcement action based on the securities industry’s concept of insider trading, while a federal court ruled in response to a motion for partial summary judgment that the CFTC must show that a price was intended to be artificial to ultimately prevail in a lawsuit alleging manipulation and attempted manipulation. In addition, the Securities and Exchange Commission agreed to settle an enforcement action with a publicly-traded company for terminating a whistleblower where an internal investigation found the whistleblower’s complaints were unfounded. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Hedge Advisor to Retailers of Fuel Products Settles With CFTC Over Charges It Acted as an Unregistered CTA; and more.

Ex-Airline Employee Sued by CFTC for Insider Trading of Futures Based on Misappropriated Information: The Commodity Futures Trading Commission brought and settled charges against Jon Ruggles, a former trader for Delta Airlines, for trading accounts in his wife’s name based on his knowledge of trades he anticipated placing for his employer. The CFTC claimed that this constituted trading on illicitly misappropriated information, and based its action, in part, on a theory equivalent to the securities concept of insider trading. According to the CFTC, Mr. Ruggles frequently placed a trade for accounts of his wife, and subsequently placed a limit order to liquidate the position at a price not then currently available in the relevant market but designed to achieve a profit. Mr. Ruggles would then place an order for his employer on the opposite side of the market for the same or greater quantity of the order for his wife’s accounts. Either his employer’s order would be totally executed against his personal order, or it would induce other traders to trade opposite his personal order. The CFTC said that Mr. Ruggles engaged in this and other types of similar illicit trading activity on 71 days from March 2012 through December 2012, achieving a profit of over US $3.5 million. (He mostly traded energy products listed on the New York Mercantile Exchange.) Mr. Ruggles’s conduct was alleged by the CFTC to constitute the employment of a manipulative or deceptive device based on his trading of material, nonpublic information that he inappropriately obtained from his employer, and fraud. To resolve the CFTC’s charges, Mr. Ruggles agreed to pay a fine of US $1.75 million; disgorge all trading profits on a specified schedule over 42 months; and never again trade on a market overseen by the CFTC. In June 2016, NYMEX brought and settled a disciplinary action against Mr. Ruggles based on similar allegations. NYMEX imposed a fine of US $500,000 against Mr. Ruggles; ordered disgorgement in excess of US $2.8 million (reduced by any amount disgorged to the CFTC); and imposed a permanent CME Group all-products trading prohibition. (Click here for details of the NYMEX disciplinary action against Mr. Ruggles, as well as an action against his wife.)

Legal Weeds: This is the second time the CFTC has brought and settled an enforcement action that sounds in the securities concept of insider trading, relying on the relatively new provision of law and CFTC rule that prohibits employment of a manipulative or deceptive device or contrivance in connection with futures or swaps trading. (Click here to access Commodity Exchange Act Section 6(c)(1), US Code § 9(1), and here to access CFTC Rule 180.1.) In the first action brought in 2015, the CFTC alleged that Arya Motazedi, a gasoline trader for an unnamed large, publicly traded corporation, similarly misappropriated trading information of his employer for his own benefit. The CFTC charged that Mr. Motazedi breached his duty of confidentiality to his employer by trading opposite the firm on 34 occasions to effectively transfer funds from his employer to himself, and in front of his employer’s orders on 12 other occasions. The CFTC has used its manipulative or deceptive device or contrivance authority in a wide range of enforcement actions stemming from its first use in the JP Morgan “London Whale” episode to subsequent allegations of illegal off-exchange metals transactions, claims of more traditional manipulation of wheat, allegations of spoofing and insider trading. The CFTC has made clear it sees its new authority “as a broad, catch-all provision reaching fraud in all its forms – that is, intentional or reckless conduct that deceives or defrauds market participants” and will use it whenever possible – including for allegations of trading on the basis of material nonpublic information obtained as a result of a breach of a duty of confidentiality, or through fraud or deception. (Click here to access the CFTC’s views on the reach its authority under CFTC Rule 180.1 in the Federal Register adopting release for this provision.)

Federal Court Holds That CFTC Must Show Artificial Price to Prevail in Traditional Manipulation Lawsuit: In connection with a motion for partial summary judgment brought by the Commodity Futures Trading Commission, Donald Wilson and DRW Investments LLC prevailed in their argument to a federal court in New York that the CFTC must prove that they had “the specific intent to affect market prices that ‘did not reflect the legitimate forces of supply and demand’” in connection with the Commission’s enforcement action against the defendants alleging manipulation and attempted manipulation. The CFTC initially filed a lawsuit in 2013, claiming the defendants manipulated and attempted to manipulate the settlement prices of the IDEX USD Three-Month Interest Rate Swap Futures contract on numerous occasions in 2011. (Click here for a copy of the CFTC’s complaint.) Respondents generally denied the CFTC’s allegations. (Click here for a copy of respondents’ answer.) In November 2015, the CFTC moved for partial summary judgment on its attempted manipulation charge based on, among other matters, the purported “undisputed material facts” that the defendants, through their conduct, evidenced “an intent to affect price.” Defendants opposed the CFTC’s motion, and their legal views were echoed by five industry organizations who appeared as friends of the court and claimed that the CFTC was applying the wrong standard. They all argued that the CFTC should be required to prove—consistent with prior case law—that the defendants intended to create an artificial price not solely to affect price, a much lesser burden, as the CFTC charged. (Click here for details of the five industry organizations’ arguments.) The court rejected the CFTC’s view of its legal requirements, and rejected both the CFTC’s motion for partial summary judgment and the defendants’ motion for summary judgment related to this matter overall.

My View: As I observed earlier this year, the CFTC defines manipulation as “[a]ny planned operation, transaction, or practice that causes or maintains an artificial price” on its own website (emphasis added). (Click here to access CFTC definitions on its website.) As the CFTC recently acknowledged in adopting its new anti-manipulation and anti-fraud rules, one of the cornerstones for proving manipulation or attempted manipulation is “that the accused specifically intended to create or effect a price or price trend that does not reflect legitimate forces of supply and demand” to wit, an artificial price. (Click here to access the CFTC Fact Sheet related to its anti-manipulation and anti-fraud rules, Rule 180.1 and 180.2.) Setting aside the long-established case law as capsulized in the decisions cited in the five organizations’ friends of the court brief and the court’s decision in this matter, it was very surprising that the CFTC argued that an attempted manipulation could be an attempt to cause anything less than an artificial price in light of the agency’s own published plain words.